I am a professor of economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Research Associate of the National Bureau of Economic Research, a contributor to Bloomberg, the FT, the Economist, Forbes, and other media and President of Economic Security Planning, Inc. -- a company that markets personal financial planning at www.esplanner.com, www.esplanner.com/basic, and www.maximizemysocialsecurity.com. Recent books: Get What's Yours -- The Secrets to Maxing Out Your Social Security Benefits, The Economic Consequences of the Vickers Commission, The Clash of Generations (with Scott Burns), Jimmy Stewart Is Dead, and Spend 'Til the End. Circle me on Google+

Social Security Q&A: Is There a Way to Avoid Multiple Years of Unemployment Reducing My Benefit?

Social Security may be your largest or one of your largest assets. How you manage it, by deciding which benefits to collect and when, can make an absolutely huge difference to your lifetime benefits. And those with the highest past covered earnings have the most to gain from maximizing their Social Security.

I’ve been answering questions and writing columns about Social Security each week for the past two years on PBS NEWSHOUR’s website. The editors at Forbes asked me to post a Q&A each day from those columns. To see all my columns, please go to my software company’s site, www.maximizemysocialsecurity.com, and click More Press below the WSJ quote.

Today’s question asks if it’s possible to avoid several years of unemployment affecting benefit calculations. The answer hinges on the number of years of covered earnings on a particular record.

Question: I have been unemployed for several years and I don’t want those years to be figured into my benefit calculations. Can you tell me how that is done?

Answer: Social Security looks at all your past covered earnings in each year since you were 16. It indexes to the economy’s average real wage growth all the past covered earnings up through age 60. It effectively lists these annual indexed amounts together with the actual (non-indexed) covered earnings after age 60. Then it takes the 35 highest of these annual values and divides by 35 times 12 to produce what it calls your Average Indexed Monthly Earnings (AIME). This quantity is then fed into a progressive Primary Insurance Amount (PIA) formula to determine your full retirement benefit were you to take your retirement benefit at full retirement age. If you have, say, 38 years in which you worked in covered employment and five years in which you were unemployed, those five years won’t enter into your highest 35 years, so they won’t impact your benefits. But if you have fewer than 35 years in which you worked and contributed to Social Security, your years of unemployment will work to reduce your PIA because your highest 35 years of covered earnings will includes years with zero covered earnings. If, for example, you have only 20 years of covered earnings and were unemployed in all other years, the AIME will be calculated by taking the sum of all your covered earnings in those 20 years and still dividing by 35 times 12, not 20 times 12. The fact that the divisor remains 35 times 12 means those years of unemployment that left you with fewer than 35 years of covered employment will, in fact, come back to bite you because they will lower your average AIME and, therefore, your PIA.

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